By Adam Levine

After he returned to Apple in 1997, Steve Jobs quickly left his mark. He first focused on getting Apple back on the path of profitability. Then he went after the organizational structure.

Nearly 30 years later, the move is still paying off, and it's an unappreciated factor in the stock's exceptional run.

When Jobs returned, Apple had a typical corporate structure, organized around product divisions. Mac ruled the roost, but there were also divisions for other things like peripherals and applications.

As is still common, each division had its own financial statement, and was run by a general manager whose main concern was that statement.

Jobs had disdain for this kind of organization early on. "We went out and hired a bunch of professional management. It didn't work at all," he said in 1984 before his ouster. "Most of them were bozos. They knew how to manage, but they didn't know how to do anything."

When Jobs returned to Apple, the product focus meant the company had multiple marketing departments.

"Product-based structures are very, very expensive since the pure version requires that many if not all functions sit under the product," Jennifer Chatman, a management professor and interim dean at the Haas-Berkeley School of Business, told Barron's. "This produces redundancies."

Within a year of returning, Jobs fired all the general managers, and reorganized the divisions around functions, and a single financial statement. The most important of these new divisions were hardware, software, and marketing, and they reported to Jobs. Bonuses were based not on division performance, but companywide financials.

"Being organized by function ensures that each function is at the top of its game, meaning that it stays on top of emerging trends and maintains deep functional expertise," Chatman says.

The structure Jobs imposed in the late 90s has remained and evolved. The services segment responsible for iCloud, Apple Music, Apple TV+ and other apps, has become more prominent, and it's now headed by Eddy Cue. Hardware has been divided into device hardware with John Ternus, and Johny Srouji's chip design unit. AI is led by John Giannandrea, after having been split off from software, Craig Federighi's domain. Once Apple became a retail company, that also got its own division, now headed by Deirdre O'Brien, who also handles human resources. But these are all still functional divisions, and they all report to Jobs' successor, Tim Cook.

One of them could replace Cook when he eventually retires.

The division heads are now area experts. "You know who the best managers are?" Jobs asked in 1984. "They're the great individual contributors who never, ever wanted to be a manager, but decide they have to be a manager because no one else is going to be able to do as good a job as them."

But beyond the managers themselves, Jobs' vision positioned the company to thrive. Every product requires all of the segments, and each division needs all the others. This increases collaboration across units, not because Jobs wanted it, but because the structure demands it. Jobs eliminated turf wars, and Mac's internal power was reduced so that other things like iPod and iPhone could flourish.

This favors leaders who can go deeply into details, and argue forcefully for their division's opinions at senior leadership meetings. Open debate is still how these meetings operate.

Having experts in senior leadership also helps Apple keep up with the relentless pace of technological innovation.

The functional leader approach does have downsides, to be sure. "It tends to put a lot of pressure on managers to coordinate without necessarily having the formal authority to direct -- increasing the risk of burnout and turnover," Phanish Puranam, a Singapore-based strategy professor at the Insead business school, told Barron's.

Apple has generally managed to avoid that kind of turnover, though. While Apple has seen leadership changes in divisions like design and retail, its heads of hardware, software, services, and marketing remain longtime Apple employees.

Apple's approach stands in contrast to its main device competitor, Samsung, which operates in four product-based divisions: DX for consumer electronics, which makes competitors in all of Apple's product categories; DS for memory and other chips; SDC for smartphone screens; and an audio products division under the Harmon brand.

The structure requires a focus on internal costs -- and the potential conflicts that come with it. Two big costs for the smartphones in DX are chips and the screen, and many of these components are sourced internally. That sets up a battle of DX against DS and SDC. DX wants the lowest internal cost for these important components, and the other segments want the highest price.

Since 1998, Apple's sales have grown by 6,482%, a 17% annualized rate, while Samsung has grown at a 10% annual clip.

Every company is different. Samsung has a sprawling portfolio of products, and Apple's lane is narrower. Samsung operates with 232 subsidiaries, and Apple has 18. Apple's structure may not be right for Samsung.

Investors tend to focus on the things that make Apple most money: iPhones and increasingly, services. But its structure is an intangible strength that is part of the foundation of Apple's long term success. It's arguably the reason the iPhone exists in the first place.

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 25, 2024 00:30 ET (05:30 GMT)

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